Sales rep prevents improper termination with rare injunction

Gerald M. Newman, partner in the Chicago law firm of Schoenberg, Finkel, Newman & Rosenberg, LLC, serves as general counsel to ERA and is a regular contributor to The Representor. He participates in Expert Access, the program that offers telephone consultations to ERA members. Gerry co-authored this article with Adam Glazer.

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You can call Gerry Newman or Adam Glazer at 312-648-2300 or send email to them at gerald.newman@sfnr.com or adam.glazer@sfnr.com.

.Courts view injunctions as “extraordinary remedies.” When injunctions issue, they generally direct maintenance of the status quo, including by preventing the responding party from moving ahead with its business plans.

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Sales rep lawsuits commonly seek to recover unpaid commissions following the termination of a rep contract. When Apex Technology Sales, Inc., a Minnesota sales rep firm, was terminated, however, it went unorthodox, responding with an underutilized remedy: seeking injunctive relief.

Courts view injunctions as “extraordinary remedies.” When injunctions issue, they generally direct maintenance of the status quo, including by preventing the responding party from moving ahead with its business plans.

This was exactly what unfolded after Leviton Manufacturing, Inc. terminated Apex in May 2017. Leviton may have anticipated a suit for breach of contract, but it could not have expected to face Apex’s action asking the court to enjoin it from terminating the rep agreement.

The parties’ contentions

Leviton, based out of New York, manufactures and distributes electrical wiring devices and network and data center connectivity solutions. In 1998, Apex signed on as its exclusive rep in Minnesota, the Dakotas, and western Wisconsin.

According to Apex, Leviton not only never expressed dissatisfaction with its sales efforts, but actually bestowed it with numerous sales awards during the course of the representation. Yet, in 2016, Leviton suddenly complained to Apex about a perceived high turnover rate and asked for an action plan.

Then, in April 2017, a Leviton official reached out to certain Apex employees to inform them that Apex’s future as its sales rep was uncertain, dropping telling remarks like, “It was nice working with you.” In May, Leviton quietly contacted Apex customers to urge them to cut Apex out of the sales channel and place their orders directly. Also during May, an Apex rep on the Leviton account resigned.

It was this resignation that Leviton acknowledges led it to send a termination letter to Apex, effective 30 days from receipt. Over the next 30 days, Apex attempted to talk Leviton out of the termination while continuing to fully perform. Apex alleges, however, that Leviton did not continue performing.

For example, Apex’s access to the Salesforce software program utilized by Leviton reps to document projects was withdrawn. Apex also claims that dating back even before the termination notice was sent, Leviton visited customers in Apex’s territory directly without coordinating the visits with Apex, in violation of industry norms.
Leviton’s side of the story holds that it was normal business operations to deny Salesforce access to terminated reps, and that Apex should have reported any projects during the 30 days after termination to a Leviton agent rather than via Salesforce. Further, Leviton denied interfering with customers in the Apex territory, and continued paying commissions during the 30-day period.

Apex responded to Leviton’s termination letter by claiming the termination was unlawful under Minnesota’s sales rep statute. Leviton wrote back claiming the law of New York, not Minnesota, governed the contract.

Tired of exchanging letters, Apex filed suit in the St. Paul, Minnesota, federal district court, asserting claims that included breach of contract by Leviton and under the Minnesota sales rep statute. At the start of the litigation, Apex also brought a motion for an injunction against Leviton to halt the termination and require the parties to continue performing under the contract. The complaint also sought to recover money damages, but that part of the case would wait for later.

The law

This choice of law dispute proved decisive to Apex’s case. Unlike virtually every other state, the Minnesota sales rep statute is expressly intended “to afford some protection to sales representatives by limiting the circumstances under which their agreements may be terminated.” Minnesota greatly limits a principal’s ability to terminate a rep agreement without good cause, and even then requires written notice laying out the reasons for termination at least 90 days before the termination takes effect. Further, the rep must be afforded 60 days to correct the stated reasons for termination.

New York, where Leviton is based, offers no comparable protection, and the choice of law section in Leviton’s rep contract squarely called for New York law to apply. However, to foil attempts by manufacturers like Leviton to subject Minnesota sales reps to the laws of another state, the Minnesota legislature added to its statute a “non-waiver” provision, rendering contract language that would apply the laws of another jurisdiction unenforceable.

The court’s decision

Consistent with Apex’s argument, the court ruled that the Minnesota statute’s non-waiver language prevented Leviton from depriving Apex of the protections afforded to sales reps by its state’s legislature. That provision rendered “null and void” Leviton’s attempt to make its rep contract subject to New York law.

Leviton was therefore required to furnish a 90-day notice for good cause termination, and a 60-day opportunity for Apex to cure any deficiencies in its performance. A “good cause” is defined in the statute to mean “a material breach of one or more provisions of a written sales representative agreement governing the relationship.”

The Leviton notice did not, of course, identify any reason for termination (much less a material breach of the rep contract), did not give 90 days notice, and did not provide Apex with an opportunity to cure any deficiencies within 60 days, all of which the Minnesota statute required.

Accordingly, the court found that these statutory violations sufficiently showed that Apex was likely to succeed on the merits of the case, which is one of the most important elements of a claim for injunctive relief.

Another key element, known as “irreparable harm,” is showing that legal remedies, usually in the form of money damages, are inadequate. Leviton argued that even if the court determined it had improperly terminated the contract, any harm inflicted on Apex could be fully addressed with a monetary award, rendering an injunction unwarranted. Apex responded that Leviton’s prominence in its line of business meant the termination would diminish its goodwill and business relationships, both with customers and with its own employees.

“Injury to goodwill,” the court stated, “may serve as the type of injury that constitutes irreparable harm for purposes of the issuance of injunctive relief.” While commission losses could be remedied with a monetary award, the potential damage to Apex’s goodwill is the kind of intangible harm suitable for injunctive relief.

The court took the rare step of issuing a preliminary injunction to interrupt the termination of the rep contract, and it ordered the parties to resume operating under its terms while the litigation proceeded, including requiring Leviton to enable Apex to use its Salesforce software.

The takeaway

While both reps and rep lawyers usually think in terms of obtaining monetary awards when commissions due go unpaid following a termination, the Apex example is worth remembering in the right case when an injury beyond the unpaid commissions can be identified. Obtaining injunctive relief is often fast and can be highly effective in restoring a sales rep’s rights. Once obtained, it also can lead to early settlement discussions. Not every contract termination or sales rep statute violation is suited for injunctive relief, so reps unfairly terminated are well-advised to confer with their counsel about the availability of this potential remedy.